Ernst Baltensperger

Alternative approaches to the theory of the banking firm

Abstract During the past decade, the importance of a sound microeconomic foundation for aggregate economic analysis has been increasingly emphasized. In this context, a satisfactory theory of bank behaviour appears as an indispensable prerequisite for a clear understanding of the workings of the financial sector of the economy. This has led to the development of a substantial literature attempting to model and explain the behaviour of banking firms. This paper presents a survey and discussion of the various approaches which can be found in this literature. A special effort is made to present an integrated view of the real resource and financial aspect: of banking activities.

Banking deregulation in Europe

Banking deregulation Ernst Baltensperger and Jean Dermine Deregulation of financial services is well under way in many European countries. This has led to fears that economies are now more vulnerable to macroeconomic shocks. The authors focus on one aspect of financial deregulation, namely liberalization of the banking system. They show that measures such as the abolition of reserve requirements increase macroeconomic variability under some circumstances but reduce it under others. No general macroeconomic case can be made for banking regulation or for its liberalization. Analysis of microeconomic issues is more fruitful. Asymmetric information and the risks of contagion in a panic can lead to runs against the banking system. To the extent that these are socially inefficient, public intervention may be justified. This presumption is stronger since the risks of bank runs have grown recently with the increased maturity mismatch – the finance of illiquid loans by liquid short-term deposits. To meet this danger, the authors recommend regulation of deposit contracts whilst preserving incentives for bank monitoring by private parties. Specifically, they propose an ex post liability of current and former depositors when banks default, thereby offsetting the incentive to withdraw funds at the onset of a crisis. Being quick off the mark would no longer be sufficient, and sophisticated depositors would press for greater disclosure and fuller monitoring of bank activities. The authors also recommend that remaining controls on deposit interest rates should be scrapped and that supervision of international banking should be cooperatively conducted by host and parent authorities.

Seigniorage, banking, and the optimal quantity of money

Abstract This paper discusses seigniorage in an economy with imperfect competition in the banking sector. The amount of total seigniorage and its division between the central bank and the banking sector are derived by using the opportunity cost concept of seigniorage. The paper analyzes the impact of changes in inflation, reserve requirements, competition and technology on the division of seigniorage and on the welfare loss and relates the analysis to the concept of the optimal quantity of money.

The Demand for M3 and Inflation Forecasts: An Empirical Analysis for Switzerland

The Demand for M3 and Inflation Forecasts: An Empirical Analysis for Switzerland. — This paper argues that money should continue to play an important role in monetary policy even if a central bank pursues a strategy based on inflation forecasts. Within the context of an error correction model, the paper delivers empirical evidence that both the growth rate of the monetary aggregate M3 and the size of excess M3 incorporate useful information with regard to future inflation in Switzerland. This evidence strongly suggests that money should remain an important indicator for monetary policy.

Reserve Requirements and Economic Stability

RESERVE REQUIREMENTS HAVE BECOME a common institutional feature of our monetary systems. They are widely held to be indispensable for zfficient control of the financial sector of the economy. Yet, relatively little analysis has been directed at the question of what constitutes an optimal level and structure of reserve requirements. In the traditional literature, the major exceptions concetn some discussions of the extreme values of 100 percent or zero requirements, especially the former (see, e.g., [1, 5, 6, 7, 10]). For a zero required reserve proposal, see [3]. In recent years, some newer studies dealing with these issues have appeared (see, e.g., [8, 9, 11, 12, 15]). In all of these studies, the focus is almost exclusively on money stock control. Generally speaking, their results support the 100 percent reserves idea, though such a scheme is usually seen as infeasible for political or institutional reasons, leading to recommendations to set requirements as high as possible against deposits included in the money stock, subject to whatever constraints of this nature are perceived. The underlying idea, of course, is that this minimizes the influence of private sector disturbances on the money stock by lowering the money multiplier (and making it equal to one in the extreme case of a 100 percent requirement). Reserve requirements are comparable to a tax on a particular economic activity, namely, the production of deposit accounts. As such, they have efficiency effects similar to those of a tax on other types of activities. Although this has always been

Central Bank Independence and Sacrifice Ratios: Some Further Considerations

The existing literature reports a positive relationship between sacrifice ratios and central bank independence. This paper discusses two critical points related to the usual procedures employed by this literature. One concerns the issue of non-stationarity of the inflation rate, the other the problem of correlation between the error terms for different disinflation episodes in the same country. The way in which the sacrifice ratio-central bank independence relationship is tested is reconsidered taking into account these points. Our results shed considerable doubts on the nature and robustness of such a relationship and on the usual interpretation given to it in the literature.

Exporting Against Risk? Theory and Evidence from Public Export Insurance Schemes in OECD Countries

This paper endeavours to find out in how far public export insurance schemes foster international trade. Thereto, a gravity equation is derived, which accounts for the risk of financial losses in case firms contract defaulting foreign buyers. Empirical results suggest that OECD countries issuing trade credits with generous state-guarantees did not, during the 1999 to 2005 period, witness more exports towards politically and commercially more unstable low-income countries. Rather, publicly indemnified trade finance has promoted exports, to a modest degree, towards high and middle-income countries, where financial intermediaries and markets provide viable alternatives to hedge against payment risks.

Banken und Finanzintermediäre

Finanzintermediare sind Unternehmungen, die sich auf Produktion, Kauf, Verkauf und Vermittlung von Finanzinstrumenten und Finanzdienstleistungen spezialisieren. Darunter fallen so unterschiedliche Institutionen wie Geschaftsbanken, Investmentbanken, Investmentfonds, Versicherungsgesellschaften und andere mehr. Prototyp des Finanzintermediars ist die Bank, also jene Institution, die Kredite von gewissen Wirtschaftsteilnehmern (Einlegern, Depositoren) nimmt und gleichzeitig Kredite an andere Wirtschaftsteilnehmer (z. B. Unternehmungen) gewahrt, also die Kreditvermittlung und -transformation zu ihrem Geschaft macht. Im Mittelpunkt der in diesem Beitrag dargestellten und besprochenen Literatur zur Finanzintermediation steht deshalb die Bank und das traditionelle Bankgeschaft — wenn auch naturlich andere Arten von Finanzdienstleistungen und damit auch andere Formen von Finanzintermediaren in unserer Wirtschaft zunehmend an Bedeutung gewinnen.

Swiss Monetary History since the Early 19th Century

This book describes the remarkable path which led to the Swiss Franc becoming the strong international currency that it is today. Ernst Baltensperger and Peter Kugler use Swiss monetary history to provide valuable insights into a number of issues concerning the organization and development of monetary institutions and currency that shaped the structure of financial markets and affected the economic course of a country in important ways. They investigate a number of topics, including the functioning of a world without a central bank, the role of competition and monopoly in money and banking, the functioning of monetary unions, monetary policy of small open economies under fixed and flexible exchange rates, the stability of money demand and supply under different monetary regimes, and the monetary and macroeconomic effects of Swiss Banking and Finance. Swiss Monetary History since the Early 19th Century illustrates the value of monetary history for understanding financial markets and macroeconomics today.

Financial integration and innovation in Europe

The creation of an internal market for financial services by the European Union, along with technological changes in communications and data management, will have a strong impact on banking and financial markets in Europe. This paper presents a selective review of discussions concerning the resulting processes of adjustment and their outcomes. Topics covered include effects on cost efficiency, competition production and trade patterns, and the dynamics of financial regulation in the open, integrated economy.